The Conservative manifesto, published yesterday, proposes several changes to the social care and benefit systems for older people in England. These are:

an increase from £23,250 to £100,000 in the capital that social care clients can retain. Once their capital falls below this level, their care will be paid for by the state – usually the local authority.

wealth to be taken into account in determining charges for care delivered at home

the Winter Fuel Payment (WFP) to be means tested, though the form of the means test is not specified in the manifesto. Thus, wealthier pensioners will not be eligible WFP.

These proposals have been criticised, notably by Sir Andrew Dilnot, author of an authoritative review of social care costs for the UK Government[1], who has argued that the proposed measures fail to provide any form of social insurance against the potentially calamitous financial effects of care charges.

His report suggested that there should be a cap on care charges of £72,000 with care costs above this limit being met by the state. The Conservative proposal is that charges continue until the client’s capital is reduced to £100,000. This is a much weaker form of risk-pooling than Dilnot’s proposal. When individuals are affected by cancer, their health care costs are covered by the state through the NHS. When individuals have dementia, which largely requires social care, all of their wealth with the exception of the last £100,000, is at risk under the Conservative proposals.

Most older people’s wealth is tied up in their property. An increasing share of those in need of social care own their houses outright and are therefore likely to have wealth in excess of £100,000. It may be necessary to sell the house to meet care charges. However, rather than requiring individuals to sell, the Conservative plan for England is to recover care charges after the death of the client (hence the “death tax” rubric given to the proposal, which closely resembles a Labour administration proposal from 2010).

The Scottish Government is responsible for the delivery and funding of social care in Scotland. It can follow its own path in relation to social care policy, though it must meet any consequent costs. There is already clear water between social care regimes north and south of the border, at least in rhetoric. Most notable is the continuing commitment of the Scottish Government to “free personal care”, a policy first introduced in 2001 and which is available to those aged 65+.

In practice, the differences are less extreme than is the popular perception. In Scottish care homes, clients receive £171 per week to cover the costs of personal care. But these clients are not eligible for Attendance Allowance – a DWP benefit available to care home residents in England, Wales and Northern Ireland, which is intended for those in need of personal care and is worth £83 per week.

Some care home residents also need nursing care: the weekly allowance for this is £78 per week in Scotland, but in England the standard rate for nursing care is £156.25 a week. For those living in care homes, financial support for personal care is more generous in Scotland than in England, but the opposite is true for nursing care.

Support to meet the costs of personal and nursing care help offset the costs of “self-funders” – those who must pay their full care home charges. Those whose capital exceeds the “capital limit” are liable to pay their care home in full, less any allowances to which they may be eligible.

In England, the capital limit is set at £23,250. In Wales, it will be £30,000 in 2017-18. Scotland’s capital limit is not significantly different from those in England and Wales. From June 1, 2017, it will be £26,500. The Conservative manifesto proposes an increase in the English capital limit to £100,000. If the Scottish Government does not match this increase, Scottish care clients will only be able to retain £26,500 of their wealth compared with £100,000 in England.

Table 1, which gives average care home charges in Scotland in 2016, shows that self-funders costs considerably exceed the allowances for personal and nursing care. They must fill the gap from their pension income and/or from their wealth. Thus, a self-funder who needs personal and nursing care faces an average bill of £814 a week. Nursing and personal care allowances will meet £249 of this charge, leaving the client to find the remaining £565 per week.

Few individuals have pensions that will cover this amount: they have little option but to run down their wealth. Since most older people’s wealth is primarily in property, this implies sale of their house, equity withdrawal, or deferred payment based on sale after death. Some Scottish local authorities already facilitate deferred payments by taking a standard security on the older person’s property.

Table 1: Average Gross Weekly Charge for Long-Stay Residents in Care Homes for Older People in Scotland With and Without Nursing Care 2016

Publicly Funded With Nursing Care

£609

Publicly Funded Without Nursing Care

£525

Self Funded With Nursing Care

£814

Self Funded Without Nursing Care

£755

All Funding With Nursing Care

£709

All Funding Without Nursing Care

£625

Source: Information Services Division, Scottish Government

From Table 1, it is also worth noting that publicly funded care home places are significantly less expensive than self-funded places. This is partly due to the greater market power of local authorities in negotiating contracts with care homes as well as quality differences.

Only around 10,000 of Scotland’s 30,000 care home places are occupied by self-funders. This means that most older care home residents in Scotland have less than £26,500 in wealth. This may reflect lower rates of home ownership among the very old clients currently resident in care homes. Some may have started with wealth in excess of the capital limit, but have been forced to fall back on publicly funded care as they have run down their wealth to meet care charges. In England, the proportion of self-funders in care homes is 45%[2], much higher than in Scotland, which perhaps reflects higher rates of home ownership in England and higher house price values.

Many individuals receive social care in their own home rather than in care homes. For them, a different funding regime applies. In Scotland, personal care for those aged 65+ provided in the home is free. Around 48,000 people aged 65+ receive personal care at home. Non-personal social care can be charged for by local authorities.

In England, all forms of care at home – personal or non-personal – are means tested. Local authorities have the power to set their own charges. Currently, means tests are only applied to income: the Conservative Manifesto proposal is to include capital. Currently, only 20% of those who receive care at home are self-funders[3]. This share will increase sharply once capital is included in the means test.

The most likely approach to setting capital limits will be to apply the same capital limits as those proposed for residential care and will therefore result in an extension of charges to those who are “asset rich, income poor”. This proposal will therefore require that those receiving care at home have access to the same set of financial instruments based on the value of their property to fund their care as care homes residents.

This provision, if enacted, will significantly change incentives for those in need of social care. Whereas the societal costs of care provision are lower than those of receiving care at home than in care homes and older people generally express a preference for staying in their own homes, the increase in charges for care at home will shift the financial incentives towards care home provision.

The Conservative Manifesto also proposes means-testing WFPs. The Conservatives have not made clear which means test would be applied, though restricting WFPs to those receiving pension credit is broadly consistent with the financial savings that the Conservatives hope to make from the measure.

The manifesto proposals are a response to a wide perception of a social care system in crisis in England: local authority budgets have been tightly concerned since the Great Recession but demand has increased broadly in line with the ageing of the population. The net budgetary implications of the proposals have not yet been assessed. And though their application is exclusively to England, they may have implications for Scotland through Barnett consequentials. Nevertheless, they invite a response from the Scottish Government, because if enacted, the proposals would cause the social care systems in Scotland and England to further diverge. The key features of this divergence will be:

the provision of “free personal care” in Scotland to those aged 65+

taking account of capital in domiciliary care charging in England

a significantly higher capital limit in England

In addition, since WFPs are about to become a responsibility of the Scottish Government, it can choose whether to follow the Conservative proposal to means test this benefit.

Taken together, the distributional effects of the policy divergence is complex: Scotland does not means test the components of the free personal care policy, which is a benefit to more affluent care recipients; taking capital into account in charging for home care will concentrate public funding on poorer care clients; the increase in capital allowances in England tends to support the better-off, who will be able to retain a larger amount of wealth. Finally, the decision to means-test WFPs is generally progressive, since it reduces payments to affluent pensioners, without affecting the income of the poor. The general direction of the Conservative proposals, however, are to extend means testing, which will support the perception that Scottish policies are biased towards supporting more affluent pensioners and care recipients.

How should the Scottish Government react to this growing divergence? It has the powers to mimic the measures set out in the Conservative Manifesto and thus reduce the gap between social care policy in Scotland and England: it can set capital limits for self-funders; determine social care charging policy; its new welfare powers would allow it to redesign WFPs. But, although some interest groups will wish to press for Scotland to follow the English lead, the proposals for England have so far failed to gather significant support. A notable flaw is the lack of any social insurance – risk sharing – aspect to the proposals.

Instead, this may be an opportune time to have a strategic review of the funding of social care in Scotland and to use this to determine whether Scotland should divert further from the English model. The last major review was carried out by Lord Sutherland in 2008[4]. Since then, the estimated cost of “free personal care” has risen by 34% to £511 million in 2014-15[5]. Scotland has acquired new welfare powers – some of which, such as Attendance Allowance and Personal Independence Payments also have a role in supporting people that need a variety of forms of care. Their interaction with the social care system operated by local authorities is unclear. The issue of making personal care free to those aged under 65 has not been resolved. Finally, their health and social care systems are in the process of being integrated to hopefully improve their overall effectiveness. An equitable and efficient funding system is essential to support this development. All of these arguments support the need to undertake a more strategic analysis of social care funding in Scotland.

One issue that a review might cover is whether the Scottish Government could implement the Dilnot proposals and thus cap lifetime care costs. This policy is perhaps more in keeping with the view of the state as providing insurance against unforseeable events (such as contracting dementia) when the private insurance market has failed. At the moment, even though Scotland has free personal care, it is not widely recognised that there is no cap on care payments. The estimated annual cost of the £72,000 cap in England was estimated at £2bn (2010 prices) in 2030 [6]. This would likely translate into a cost of around £200m in Scotland. Thus, the review could be charged with examining the merits of, for example, reducing the generosity of WFPs to more affluent pensioners, in order to provide social insurance against excessive care charges. Clearly other policy directions could be examined, but the likelihood of a significant change in social care funding in England is perhaps a catalyst for Scotland to re-examine its current model.

[5] Included in this cost is the £368 million used to support home care clients in 2014-15. This amount covered the cost of services to all personal care clients aged 65+, whether or not they would have had to pay under a means-tested system. This issue makes the estimate of free personal care subject to a considerable margin of error.

This blog links to a paper, “Area-based policies and devolved governments”which discusses possible post-Brexit futures for policies that, under current EU rules, are linked to specific locations within the UK and are largely administered by the devolved governments.

My estimates of the implied probability of a “leave” outcome in the EU referendum using the bookies odds from Oddschecker.com have attracted much comment. Some critics seem to have a weak understanding of the nature of prediction markets. For example, the argument is put that probabilities derived from the betting odds are of no value because punters are not a representative sample of the population. However, it should be obvious that those betting on the outcome of an event do not need to be a representative sample of the population – they are predicting, not voting.

As a result of the Scotland Act 2016, the Scottish Government will take over a range of disability benefits and the regulated social fund. Together these benefits cost around £2.5 billion in 2013-14. Total spending on benefits, tax credits and pensions in Scotland by the Department for Work and Pensions (DWP) was around £17.8 billion in 2013-14, so those being devolved cover less than one sixth of total DWP expenditure in Scotland. The largest single component of DWP spending will remain the state pension, which cost £7.1 billion in 2013-14. Tax credits cost £2.2bn. They are not included in the analsys of benefits that follows. Continue reading →

In last week’s budget, the Chancellor announced his intention to increase the personal allowance for income tax from £11,000 in 2016-17 to £11,500 in 2017-18. He also intends to increase the higher rate threshold from £43,000 in 2016-17 to £45,000 in 2017-18. The increase in the higher rate threshold has attracted particular criticism because it will principally benefit middle to high income earners.

The Scottish Government will have the power to set tax rates and thresholds for Scotland from 2017-18 now that the Scotland Act 2016 has been passed. The Scottish Government can therefore choose to implement the increase in the higher rate allowance. The SNP, Labour and Lib-Dem parties have suggested that, if elected, they would not follow this above-inflation increase in the higher rate threshold. Continue reading →

In the first of a series of analyses of the Scottish parties’ manifesto proposals from the University of Stirling and Centre on Constitutional Change, David Bell and David Eiser consider the Labour proposals for income tax announced earlier this week.

After years of silence on the tax powers which Scotland already had, the Labour Party has put forward proposals to increase the Scottish Rate of Income Tax (SRIT) – which comes into force in 2016/17 – by 1p. The SRIT is effectively a flat rate of tax of 10p on all non-savings, non-dividend income above the personal allowance. Therefore, if SRIT is raised by 1p, the basic rate of income tax in Scotland is raised from 20p to 21p, the higher rate from 40p to 41p, and the additional rate from 45p to 46p.

The advantages and disadvantages of raising the SRIT to 11p have been hotly debated in the Scottish Parliament and elsewhere. A 1p increase would raise about £470m revenue for the Scottish Government. But where would the burden of paying for this increase fall? Continue reading →

The latest GDP figures were released today. They show the Scottish economy grew by 0.1% in 2015 Q3. This is a fairly weak performance. The UK economy as a whole grew by 0.4% in the same quarter; it grew by 2.1% over the previous year compared to Scotland’s growth of 1.7%.

The slowdown has been concentrated in the production sector, with some contribution from weakening output in government and other services.

Given this relatively poor performance in 2015, what are the prospects for 2016? We have been constructing a small statistical model based on interactions between the Scottish and UK goods and labour markets. Later in this blog, we describe forecasts for Scotland based on this model. Continue reading →

It is relatively easy to slip into the belief that the Scottish labour market has performed as well as the rest of the UK since the beginning of the Great Recession in 2008. Scotland’s unemployment rate, like that in the rest of the UK, is close to its pre-recession level of around 5% (see Figure 1). By international, and particularly European, standards, this is a very low rate.

It is relatively easy to slip into the belief that the Scottish labour market has performed as well as the rest of the UK since the beginning of the Great Recession in 2008. Scotland’s unemployment rate, like that in the rest of the UK, is close to its pre-recession level of around 5% (see Figure 1). By international, and particularly European, standards, this is a very low rate.

We knew a lot of the context before John Swinney stood up to deliver his Draft Budget on Wednesday. The Scottish Government’s grant from Westminster for day-to-day spending would be 1 per cent smaller in 2016/17 as it was 2015/16. Its grant for capital spending on the other hand would increase by almost 5 per cent.

Looking slightly longer term, the block grant from Westminster to the Scottish Government for resource spending will fall by 5% in real terms over the period to 2019/20. So the next few years will continue to be about austerity.

However, rather than set detailed spending priorities for the next few years, the Budget that Swinney delivered on Wednesday sets detailed spending priorities for 2016/17 only. With elections to Holyrood in May next year, setting longer term priorities in detail would be inappropriate. Continue reading →